A spotlight has once again been shone on investment confidence and company cash piles today with the Treasury expected to call British businesses to invest more. Is this a fair call for the government to be making and do businesses really have £500 billon cash that could be invested today?
Investment involves complex decisions and companies must weigh up investment options against a wide range of risks and uncertainties. The nature and extent of these risks and uncertainties may suggest that perhaps businesses reticence to invest up to this point has been justified.
More recently though we have seen a reasonable pick-up in economic indicators suggesting we may have turned a corner. We have seen some broad based growth returning to the economy, net trade positively contributing to the economy in the first half of this year, consumption and confidence indicators picking up and surveys such as EEF's own Business Trends Survey showing some resurgence in activity. In our latest survey, investment intentions for the year ahead increased sharply to a six year high. As yet though, investment figures have not picked up and business investment remains 25% below the pre-recession peak.
Another reason behind the call for more businesses to invest relates to the cash reserves that businesses are holding. According to National Statistics, £500 billion cash is held by non-financial businesses and this figure has grown significantly over the past decade. But we need to be careful when we talk about these reserves for a number of reasons:
- Businesses will need to maintain some level of cash reserves so not all of this should or could be spent.
- The growth in cash reserves over the last 10 years has largely taken place offshore, so in actual face may not be available for investment in the UK.
- According to ONS and the OBR at least 20% (but likely more) of the cash held offshore is held by financial institutions so will not be available for investment by companies.
- Lastly, much of this is held by large corporations – not all businesses have a pile of cash on their balance sheets. We know that many SMEs face constraints accessing the finance they need to invest and have seen some increase in cash holdings as a result.
Small and large companies holding more cash on balance sheets% balance of companies holding more cash on their balance sheets as a result of the financial crisis and uncertainty in the business environmentSource: EEF/GfK NOP Investment Survey
So is the recent better news about the state of the economy and the healthy sounding cash balances enough to get business investing more?
The economic environment is certainly more conducive and supportive of investment but risks and uncertainties still remain. The Eurozone still faces many years of reform, the US debt ceiling issues has been delayed by a six months and emerging markets are showing some weakness.
The planning horizon for investment is also long, with most companies planning between one and three years ahead. Given this, many companies will not just be able to flick the switch and invest immediately. Rather the changed business environment may mean companies reconsider their plans for the years ahead and, while investment plans may be bought forward or increased, it is not likely to lead to an immediate increase in investment.
Also, in calling for businesses to invest more, the Government needs to play its part. It can do this by providing greater stability and certainty about the business environment to give businesses reasons to invest and to do so in the UK.
The government's choices and policy decisions have a real impact on manufacturers' investment decisions. In an investment survey published late last year, we asked manufacturers what policy changes would lead companies to increase investment in the UK the most. Not surprisingly, having a clear long-term strategy would have the biggest impact on investment in the UK:
- 19% of manufacturers said a long-term strategy would have the biggest positive impact on investment in the UK.
- 53% said a long-term strategy was among the top three changes that would impact investment in the UK.
This clear strategy needs to provide greater certainty over a wide range of policy areas that matter for business including but not limited to, taxes; access to finance; skills; energy costs; and innovation.